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NZ annual inflation may have slowed to 1.9% in 2Q, quelling rate-hike talk

Annual inflation may have eased back below 2 percent in the second quarter as weak fuel prices offset a lift in food prices and may stifle market chatter that the Reserve Bank of New Zealand will soon join other central banks embarking on a tightening cycle.

Economists expect inflation was 0.2 percent in the three months ended June 30, for an annual rate of 1.9 percent, according to the median in a poll of 15 economists surveyed by Bloomberg. That would be below the central bank's projection of inflation of 0.3 percent in the second quarter for an annual rise of 2.1 percent. The data is due Tuesday.

The Reserve Bank is mandated with keeping annual inflation between 1 and 3 percent, with a focus on the mid-point. However, "a downside surprise on inflation is unlikely to be too much of a concern for the Reserve Bank, which had already concluded that the recent pickup was temporary and that inflation would be well below 2 percent again by next year," said Westpac Banking Corp acting chief economist Michael Gordon.

Gordon is expecting quarter-on-quarter inflation of 0.1 percent and annual inflation of 1.8 percent as a "well-publicised spike in vegetable prices has been offset by a fall in fuel prices." He doesn't expect any rate increases until 2019, in line with what the central bank reiterated in its July monetary policy statement when it kept rates on hold at a record low 1.75 percent.

However, while a lower CPI reading won't rattle the Reserve Bank, Gordon said it would present a challenge to financial markets, which are "too eager" to assume the RBNZ will soon join the club of central banks that are contemplating interest rate hikes. Interest rate markets are now tipping the first rate hike to come in June 2018.

The Bank of Canada raised interest rates for the first time in nearly seven years on Wednesday, saying the economy no longer needed as much stimulus and sending the Canadian dollar to a near 11-month high on expectations of more rate hikes to come. Other central banks, such as the European Central Bank and the Bank of England have also indicated a gradual withdrawal of stimulus will kick off soon.

Bank of New Zealand senior markets strategist Jason Wong said there are some views from offshore that the RBNZ will be pulled into the global central bank moves towards indicating less policy accommodation. However, recent strength in the New Zealand dollar and lower oil prices add downside risk to the RBNZ's prevailing CPI forecasts and "this supports the bank's view that monetary policy accommodation can remain for a considerable period," he said.

The second-quarter CPI release is expected to be supportive of the RBNZ's stance that the recent rise in headline inflation was simply driven by temporary factors, said BNZ. It also expects a soft outcome of 0.1 percent quarter-on-quarter and 1.8 percent year-on-year.

ANZ Bank New Zealand senior economist Phil Borkin expects a quarter-on-quarter rise of 0.2 percent and an annual lift of 1.9 percent but did note the economy is increasingly butting up against capacity pressures, construction cost inflation remains rampant, and firms' pricing intentions are ticking higher.

Those developments "leave us with the belief that domestic inflation pressures will broaden and rise in time," he said. Wage inflation is likely to lift as firms are forced to respond to skill shortages, cost of living pressures and government policy changes and "that should eventually warrant a shift in stance and ultimately the gradual removal of monetary policy stimulus," Borkin said.